Product Management and Business Strategy, focused on the tech industry

Is streaming video a disruptive technology?

Reaction to Netflix’s decision to spit streaming video and DVD rental into separate business has ranged from awe to bafflement. Clayton Christen who is the oracle when it comes to disruptive innovation says:

And while it’s always worrisome to disagree with a luminary like Clayton Christen, I’m not buying that streaming video is a disruptive technology for Netflix. The key element of a disruptive technology is that it’s performance is much poorer on some attribute that the incumbents dismiss it. Let’s looks at attributes of streaming vs. DVD:

Attribute

Streaming Video

DVD

Advantage

Time to content

30 seconds

minimum 2 days

Streaming

Content Consumable in Month

More than anyone should watch

Limited by DVD mailing time

Streaming

Video quality

HD – depends on bandwidth

Full 1080p with Blu-ray

DVD

Equipment Needed

Streaming enabled TV or Blu-ray player, Broadband internet

DVD or Blu-ray player

DVD

Payment model

Subscription (or pay per at competitors)

Subscription (or pay per at competitors)

Draw

Cost

$7.99/month

$7.99 and up, depending on number of discs, Blu-ray

Streaming

Streaming’s instant access alone means most people find it superior. Given the choice of the same content library and same price, most consumers (at least the ones with solid broadband connections) would opt for streaming.

Many would argue the content available on DVD is far greater so that’s a strong advantage for DVD. However, that’s not an advantage of DVD technology itself but rather an artifact of US copyright law. As a matter of technology, DVD and streaming are both capable of delivering the same content. And the limitation on catalog is not an issue for content producers who want to enter the streaming video market.

Incumbents like Amazon and Apple embraced streaming video quite early on. The TV studios have gone so far as to create their own service, Hulu. Television networks like ABC, NBC and HBO, all offer their content via streaming through their websites and iPad apps. Cable companies like Comcast offer extensive video on demand services. I’m hard pressed to think of an incumbent in the entertainment space who did not see streaming video coming and enter the market. Retailers without the resources and technical know-how of Amazon are the only ones I can think of.

Looking at the combination of streaming technology not seriously lacking in any performance attribute and most incumbents in the entertainment space already entering the streaming market, I can only conclude that streaming video is a sustaining technology and not a disruptive one at least when it comes to Netflix’s existing DVD business. The cable and satellite TV business models of expensive packages of channels will experience declines as streaming grows and the reluctance to give up the large revenue streams that channel packages provide may cause the TV providers to move less aggressively into streaming content which is a disruption story.

Netflix’s decision to break streaming and DVD into separate brands services is a risky gambit due to the impacts I outline in my last post. The rational for separating the pricing makes plenty of sense as content licensing costs will grow as Netflix expands it’s content library and as Bill Gurley points out, licensing costs may be driven by the number of subscribers. But given that the disruptive technology story does not fit for streaming vs DVD, it’s hard to see how side-lining the DVD business is good move for Netflix’s customers or investors.